A recent article in the New York Times discussed the trend toward not using Non-Disclosure Agreements (NDAs) with a variety of players in the startup ecosystem. Titled Why More Start-ups Are Sharing Ideas Without Legal Protection, the piece focused on founders asking potential investors to sign NDAs and offered some great tips.
We agree with this article that investors’ reasons for not signing a NDA are unrelated to the notions of stealing the founder’s idea. The likelihood of a professional investor hearing an idea and executing the full business plan is minuscule and, in my experience, asking an investor to sign a NDA is a waste of time. But, as the article mentioned, when it comes to working with manufacturers, customers, or partners, NDAs are critical–often before funding is even contemplated.
No one will protect your business like you will, so it’s important to take such precautions when working with others. I believe that startups should focus on and consider NDAs when working with these three groups, and have elaborated more below on each:
Potential Co-Founders & Team
If you are the original founder and want to build a team, which in itself is a key component, you may be searching for co-founders, employees, and/or contractors.
As an investor prior to founding Traklight, I realize that the value of your company is in the execution (I have even been known to say, “Take my idea and execute, I dare you.”). However, when you are in the early days of your business, you must be very careful sharing your ideas with people you do not know. Asking for a NDA before an interview is not unheard of and something that we did with Traklight in our early stages.
Later, as you hire your employees and contractors, make sure that they in turn understand the need for NDAs for certain negotiations, customer focus groups, and partnerships. Always remember it is not just the patentable IP that needs to be covered by NDAs–trade secrets are often just as valuable.
Contractors, Manufacturers, or Freelancers
If you are working on products or developing software and need to outsource creation of the prototype or minimum viable product, first research the companies thoroughly. Do not be surprised if you are asked to sign a mutual NDA; you may become privy to others’ secrets and confidential information during contract talks and the selection process.
Be careful when you are using freelancers for design or software–particularly online–because the tendency is to simply agree to the terms and conditions. Slow down, and read those terms carefully to determine what is confidential and of course who owns the end work product.
One of our clients conducted new feature beta testing with customers using a Facebook group. Nothing was signed and people were privy to confidential information, putting their product roadmap and plans at risk.
Mutual NDAs should be used early on. The same principle applies to strategic partners. Anyone who will not agree in writing to keep the secret sauce for your company in confidence will not be a good business partner.
Special Note on Invention Companies
Extreme caution should be exercised when sharing your proprietary information with anyone who offers to help you with idea execution! This will be the topic of an upcoming case study, so stay tuned.
All that said, I am a firm believer in nothing ventured, nothing gained; sometimes you may run into a non-investor situation where you cannot be protected by NDA. If you decide to proceed without a NDA, ensure you take the following precautions:
- Check your crowd and learn as much as you can about the other company’s reputation.
- Give out just as much information as needed to move discussions forward.
- If your gut says no, do not proceed.
Finally after you weigh the risks, please remember that enforcing a NDA, like any type of litigation, is a huge distraction for a startup or small business. The pros and cons of both sides must be weighed to make the right decision that’s best for your company.
Mary Juetten, founder and CEO, created Traklight.com while earning her JD, and leveraged 25+ years of experience to launch the software.